GBP/JPY bounces firmly at key 149.00 area as broad risk appetite rebounds

• GBP/JPY saw a solid bounce on Monday in tandem with a broad upturn in risk appetite.
• The pair bounced at the key 149.00 area and a more dovish sounding BoE may keep the gains capped.
• Technicians will be eyeing a key area of resistance in the mid-152.00s.

GBP/JPY has seen a solid recovery on Monday from the multi-month lows its posted last Friday under 149.00 and is currently trading close to session highs in the 150.40s, up about 0.8% on the session. The 149.00 are has been a key zone of support over the last few months. The pair has been choppy in recent weeks, falling sharply at the end of November as the news of the emergence of the new Omicron Covid-19 variant dented global risk appetite. Risk-on/risk-off has been the main driver of the pair since then and this remains the case on Monday.

Stocks and other risk assets like crude oil are higher amid hopes that the Omicron variant will prove much milder than previous Covid-19 variants like delta and this is weighing on safe-haven currencies like the yen. If fears about the new variant and any disruption it may cause to the global economic recovery do continue to ebb, it wouldn’t be surprising to see risk assets continue to press higher and GBP/JPY continues to recover as a result. Near-term bulls may target a retest of the key mid-152.00s area which has acted as both resistance and support on numerous occasions in recent months.

One interesting theme in FX markets will be whether the theme of central bank divergence will return as a major driver of price action. Prior to the re-emergence of risk-off at the end of November, a key driver of GBP/JPY has been shifts in BoE monetary tightening expectations and associated moves in UK bond yields. The rhetoric from BoE members in recent days has lent more dovish. BoE Monetary Policy Committee member Michael Saunders, who voted in favour of a 15bps rate hike back in November, said he wanted more information about the impact of the new Omicron coronavirus variant before deciding how to vote this month. The message from BoE Deputy Governor Ben Broadbent on Monday was similar.

As a result, a 15bps rate hike this month from the bank has now been nearly completely priced out by the market. As a result, in the run-up to next Thursday's BoE meeting, the 152.50 area may well act as a ceiling for the price action. Over the short-medium term, it seems likely that a 149.00-152.50ish range may prevail.